This Uniform Company is Chugging Along Uniformly

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Cintas Corporation (NASDAQ: CTAS), a provider of corporate identity uniforms and other business related services, reported a double-digit increase in profit in the first quarter of fiscal 2013. Its revenue improved 3.4%, operating margin inched north due to improvement in the cost structure and savings in energy related costs.

Low GDP predictions and low employment opportunities have weighed in on the company’s results. Still, it managed to post improved results in the quarter despite facing headwinds. Let’s take a detailed look at Cintas’ performance.

What Numbers Say?

Cintas’ posted revenue of $1059 million in the quarter, as compared to $1017 million in the prior year period. The primary driver behind the revenue increase was an increase in sales of Rental uniforms and ancillary products. However, a fall in the prices of recycled papers did drag down the performance a bit.

The Company’s operating income exhibited an improvement of 8.3% from last year, clocking $139.3 million in the quarter. Net income increased to $76.7 million as compared to $68.6 million in last year’s first quarter. Earnings per diluted share (EPS) for the first quarter were $0.60 compared to $0.52 earnings per diluted share last year.

Reserves, dividend, and buy backs

Cintas’ accrual over the last year has been positive suggesting a buildup of reserves.  The company is recording a proper level of reserves compared to its peers.

Cintas has paid relatively low dividends which are only about 1.3% of its current price levels but with strong free cash flow it can sustain its current payouts. The dividends can also be increased as the company is expected to have decent cash flows in the future. I should make it clear that increasing dividends is entirely on the management and what I am focusing is that the company has the potential to pay better dividends in future.

The buyback of 1.8 million shares at an average price of $70.6 million was another highlight. The buyback had no impact on the present quarter as such but if the economy does not deteriorates further the earnings on per share basis is expected to improve by about $ 0.03. The company has further $299.8 million available for share buyback under its authorization as of August 31, 2012.

Looking Around

Cintas faces strong competition from other players in the rental uniforms category. For example, peer G&K Services (NASDAQ: GK) has also seen an improvement in its rental sales and witnessed an improvement in top line. The company posted a 5% jump in revenue in its latest quarter and its net income was up 47%.The company has strong cash flows, further improved operating cash flows suggesting core business activities are being better managed. Capital expenditures have increased last year by more than $13 million signifying potentials of growth in revenue and profitability.

Superior Uniform Group, Inc. (NASDAQ: SGC) have reported an increase in sales in the last quarter and expects the benefits of increased market position they have achieved. The growth in sales though had been at a slower rate but with newer accounts the potential of the company to grow have increased. The strong financial position will back the company’s ongoing growth initiative.

My Take

The strong use of leverage shows that value is being added for its shareholders. As rentals is about three-fourth of the revenue and with the company’s efficient distribution network the company does not need to worry much about the GDP growth to continue the same levels of earnings. I would suggest the company as a definite hold, but with a relatively long gestation period.

tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cintas. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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